Tim Worstall is a Senior Fellow at the Adam Smith Institute in London, and one of the global experts on the metal scandium, one of the rare earths. His book, Chasing Rainbows, on the economics of climate change, is available at Amazon.

You think mutual banking is a good idea? Look at Spain

The financial crisis was of course brought on by the wicked capitalist nature of the banking system. Shareholders were after short-term profits, bankers themselves were so motivated by huge bonuses that no one cared about the fragility of the system at all. We must return to local banking, to mutual banking, where the customers are not gouged for the benefits of the Vampire Squids.

In fact, as everyone from the new economics foundation through Compass to the Labour Party and even some normally sensible people too the answer lies in revitalising regional banking, where local politicians can make sure that the wider interests of the local economy are considered in loan decisions. We should not consider simply the grubby calculus of profit and loss but the social and societal impacts as well. We need to have not for profit mutuals in a state/private partnership in order to make sure such a crash can never happen again!

I don't think I've left out any of the usual cliches have I?

Now I've nothing against mutual anythings, nor non-profits. It's your life and money and it's the neoliberals like me who think you've every right to spend both as you wish. However, there is just a teensie problem with this idea. For what you've just recreated is the Spanish banking system – which is currently imploding.

Ambrose has a piece today on the rescue of Bankia. It's big enough that it's putting Spain's entire deficit reduction programme at risk. And Bankia itself, was it one of those great big capitalist banks that took too much risk in pursuit of shareholders' profits and bankers bonuses?

No, actually, it wasn't: it's the recent product of the merger of some of the country's cajas. In fact all of the country's cajas are experiencing terrible problems and are being forced into mergers along with possible divisions into good and bad banks. The numbers are being argued about, as to whether they need €50 billion of extra capital or €150 billion, but more they most certainly need. This is the part of the Spanish banking system that is imploding and this is perhaps Spain's biggest economic problem at present.

At which point perhaps we should reveal what a caja is. It's a regional mutually owned bank. One that's usually not for profit, any profits being devoted to regional social and societal programmes. They have almost all been governed by the local great and the good, including the local politicians who get to direct their lending towards, um, the public good, shall we say?

Bankia was created just 17 months ago by the merger of seven regional savings banks in an attempt to shore up their combined defences against the bad real estate loans, worthless building land and unsold apartment blocks they had accumulated.

Saving banks, many controlled by local politicians, were the most reckless lenders to developers, land speculators and building companies, which have left Spanish banks burdened with €184bn of problem loans and assets.

The neoliberal argument is often misunderstood. We don't actually say that markets are perfect. We do say that control by politics and politicians is often worse.

In this particular instance you can take your pick: the UK retail banking system didn't do so well; this is true. But nor has the politically directed one in Spain – so politically directed mutual banking for the UK may not be a solution, either.